A bright fu­ture for clean tech­nol­ogy

Ob­servers might be for­given for think­ing that so-called clean tech­nol­ogy’s mo­ment in the sun has passed. Over the last two years, many clean-tech eq­uity in­dexes have per­formed poorly. In Europe, so­lar power took a hit af­ter the Euro­pean Com­mis­sion de­cided to phase out sub­si­dies for re­new­able en­ergy by 2017. The in­stal­la­tion of so­lar pan­els fell by nearly 60% in Ger­many in 2013, and by 70% in Italy. Mean­while, in the United King­dom, less than 30% of earlystage ven­ture-cap­i­tal-funded clean-tech deals were fi­nanced.

The truth is that we have been here be­fore. The con­vul­sions in the clean-tech sec­tor are sim­ply symptoms of a cy­cle that char­ac­terises emerg­ing tech­nolo­gies: ex­cite­ment, in­flated ex­pec­ta­tions, and con­sol­i­da­tion – ul­ti­mately fol­lowed by sta­bil­ity and the re­sump­tion of growth. In­deed, un­der­ly­ing re­cent de­vel­op­ments are signs of a much more sig­nif­i­cant trans­for­ma­tion: clean tech is be­com­ing com­mer­cially vi­able.

Con­fi­dence in the clean-tech sec­tor’s fu­ture is rooted in the need for sus­tain­able so­lu­tions for a planet that is sup­port­ing an ever-wealth­ier pop­u­la­tion. Over the next 20 years, the num­ber of mid­dle-class con­sumers is ex­pected to rise to some 3 bln, from 1.8 bln to­day. Their new life­styles will re­quire re­sources, in­clud­ing en­ergy.

This surge in de­mand will oc­cur at a time when find­ing, de­vel­op­ing, and ex­tract­ing new sources of en­ergy and re­sources will be in­creas­ingly chal­leng­ing and ex­pen­sive. Over the last 12 years, for ex­am­ple, the av­er­age real con­struc­tion cost of an oil well has dou­bled, and in re­cent years new min­ing dis­cov­er­ies have been few, de­spite the in­dus­try’s best (and of­ten ex­pen­sive) ef­forts. But cleanen­ergy costs are trend­ing in the op­po­site di­rec­tion, ripen­ing th­ese so­lu­tions at a time when need – par­tic­u­larly in some of the world’s largest de­vel­op­ing cities – is be­com­ing acute.

One piv­otal ques­tion for the fu­ture of clean tech has been whether it needs reg­u­la­tory sup­port to thrive. To be sure, the with­drawal of sub­si­dies in Europe hit the sec­tor hard. But, even as Ger­many and Italy lost their first- and sec­ond-place rank­ings in terms of new so­lar-power in­stal­la­tions, China and Ja­pan took their place. Glob­ally, the so­lar-power in­dus­try has grown at an av­er­age an­nual rate of 57% since 2006.

Reg­u­la­tory sup­port has been ef­fec­tive in cre­at­ing de­mand and al­low­ing sources of re­new­able sup­ply to reach scale. But such sup­port has not al­ways been eco­nom­i­cally ef­fi­cient. One les­son from the Ger­man ex­pe­ri­ence is that sud­den changes in reg­u­la­tion can cre­ate peaks and val­leys in de­mand that are not help­ful to an in­dus­try that is still emerg­ing. The big­gest risk in many mar­kets is not that sub­si­dies and other sup­ports will be with­drawn, but that the reg­u­la­tory struc­ture will not adapt as the sec­tor de­vel­ops.

A thriv­ing global mar­ket­place goes a long way to­ward lev­el­ing the play­ing field across all re­source op­tions. Dur­ing the last five years, dozens of so­lar man­u­fac­tur­ing com­pa­nies have failed, only to be re­placed by stronger, more in­no­va­tive, and more ef­fi­cient play­ers. More than one-quar­ter of cu­mu­la­tive global so­lar pho­to­voltaic ca­pac­ity was in­stalled just in the past year. The In­ter­na­tional En­ergy Agency, which has been con­ser­va­tive re­gard­ing so­lar en­ergy’s prospects, now ex­pects it to be the world’s largest power source by 2050.

Nonethe­less, con­cerns about the fu­ture of clean tech have made new projects more dif­fi­cult to fi­nance. But in­no­va­tive new schemes, such as clean-tech bonds and third-party fi­nanc­ing, are chang­ing the pic­ture. Third-party own­er­ship, in which a com­pany in­stalls and main­tains so­lar pan­els, in ex­change for ei­ther a set monthly rate or a fixed price per unit of power, has driven up adop­tion rates in Cal­i­for­nia, fi­nanc­ing more than two-thirds of new in­stal­la­tions in 2012 and 2013. Sim­i­larly, new part­ner­ships with large in­dus­try in­cum­bents – such as the tie-up be­tween Daim­ler and Tesla and the con­trol­ling stake that To­tal took in SunPower – are re­duc­ing the cost of fi­nance for smaller firms.

Clean-tech com­pa­nies are be­com­ing more so­phis­ti­cated and cre­ative. An en­tire new in­dus­try has been cre­ated around the use of in­for­ma­tion tech­nol­ogy to re­duce en­ergy con­sump­tion. Some com­pa­nies, such as C3 En­ergy, of­fer elec­tric util­i­ties soft­ware that can an­a­lyse their elec­tri­cal net­works to im­prove grid op­er­a­tions and as­set utilisation, in­creas­ing prof­its. Smart-grid hard­ware has been de­ployed widely in the past decade, and as com­pa­nies fig­ure out how to use big data and an­a­lytic tools, it will be­come much more im­por­tant. Google’s ac­qui­si­tion of Nest Labs for $3.2 bln is a good ex­am­ple of the value that com­pa­nies are plac­ing on this kind of data.

All of this adds up to an in­dus­try that Bloomberg cal­cu­lates reached $310 bln in in­vest­ment last year. This is not a “niche” seg­ment, but an as­set-in­ten­sive in­dus­try on its way to com­modi­ti­sa­tion.

Clean tech is ma­tur­ing and adopt­ing proven man­age­ment prac­tices in op­er­a­tions, mar­ket­ing, sales, and dis­tri­bu­tion. In­creas­ingly, the in­dus­try is im­ple­ment­ing ap­proaches that have en­sured suc­cess in other sec­tors, such as re­duc­ing pro­cure­ment costs and de­ploy­ing lean prin­ci­ples in man­u­fac­tur­ing. As clean-tech busi­nesses con­tinue to scale up, there will be ad­di­tional op­por­tu­ni­ties to im­prove.

The shake­out in the clean-tech in­dus­try has been tough; but it has also been typ­i­cal of emerg­ing tech­nolo­gies, and, by weed­ing out the weaker play­ers, it has made the sec­tor more ro­bust. This is a global seg­ment meet­ing a grow­ing global need. There is lit­tle room for doubt that the clean-tech in­dus­try can ex­pect plenty of sunny days ahead.